You always hear about ultra high net worth individuals buying and selling “investment pieces”. That phrase might refer to art, fine wine, luxury wristwatches, rare books, even historical memorabilia. These people, the rare type that wouldn’t be out of place at a Sotheby’s or Christie’s auction, can afford entry to these incredible asset classes. And many of these asset classes have extensive histories of impressive returns.
Unfortunately, for most people, they’ve been inaccessible. Not all of us can flex like Dwayne “The Rock” Johnson with a T-Rex skull in the background of our ESPN interview.
Instead, those of us who can’t get our hands on a 1952 Mickey Mantle card or who won’t be donating a Warhol to a museum for the tax write-off have long been relegated to the sidelines.
But no longer…thanks to fractional investing. What exactly is that, though?
Long story short: platforms like Rally, Masterworks, Collectable, Vint, and others are democratizing the ownership of these types of assets. But, how does the fractionalization of an asset work? Here's how they do it.
What these platforms do is buy an asset like a sports card or a work of art, and then they put the necessary paperwork in place to register these assets with the SEC. That’s right, the Securities and Exchange Commission. Because what they’re doing is securitizing the ownership of these assets, essentially making them into financial instruments. What does securitization mean? Well, there’s a lot that goes into that process, but at a high level, they’re creating regulated securities that allow mainstream investors like you and I to own a share of a Mantle or a Warhol.
Once they’ve gotten that SEC approval, the marketplace then conducts an IPO - an initial public offering - for the asset. They’ve set an IPO market cap - the total valuation of the asset - and they proceed to offer shares to the public.
Let’s say the asset is a rare book - a first edition copy of Harry Potter and the Philosopher’s Stone. Rally set the initial offering market cap at $72,000 back in November of 2019, and set the price per share at $24. Let’s say I was interested in this asset, and I bought five shares, or $120 worth. That means I own about 0.2% of the book. Okay, not much, but 0.2% more than I otherwise could’ve.
Once an offering has filled and some time has passed, most fractional marketplaces will allow secondary market trading of the asset. So, users looking to sell their stake can get some liquidity, and those that missed out on the IPO have another chance to gain exposure. With that market buying and selling activity, the price per share changes, just like it would in the stock market. Assets in vogue often appreciate in value, and those with less encouraging data points - like weak comparable sales at auction - might decline.
So those five shares of Harry Potter that I bought at $24? By the start of 2022, the share price was $45, and my total $120 investment would be valued at $225, good for an 87.5% return.
And those high net worth individuals we were talking about earlier? If they see an asset they like, they have the ability to submit a buyout offer for the whole thing. Now, that’s a bigger topic for another day, but if that offer is approved - typically by shareholders and the platform - shareholders receive the proceeds from the sale. That’s another way returns are generated.
So, the next time you hear about an “investment piece”, remember it’s no longer limited to the ultra wealthy. Thanks to fractional investing, even the most coveted of alternative assets are finally within reach.
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